ACC
563 Week 4 Homework Chapter 6 and 7
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ACC
563 Chapter 6 and 7Week 4 Homework
Chapter 6
Case 6-4
It is important in accounting theory to be able
to distinguish the types of accounting changes.
Required:
a. If a
public company desires to change from the sum-of-year’s-digits depreciation
method to the straight-line method for its fixed assets, what type of
accounting change will this be? How would it be treated? Discuss the
permissibility of this change.
b. If a
public company obtained additional information about the service lives of some
of its fixed assets that showed that the service lives previously used should
be shortened, what type of accounting change would this be? Include in your
discussion how the change should be reported in the income statement of the
year of the change and what disclosures should be made in the financial
statements or notes.
c.
Changing specific subsidiaries comprising the group of companies for which
consolidated financial statements are presented is an example of what type of
accounting change? What effect does it have on the consolidated income
statements?
Case 6-6
APB Opinion No. 20 was concerned with accounting
changes. SFAS No. 154 (see FASB ASC 250) changes the accounting treatment for
some accounting changes.
Required:
a.
Define, discuss, and illustrate each of the following in such a way that one
can be distinguished from the other:
i. An accounting change
ii. A
correction of an error in previously issued financial statements
b.
Discuss the justification for a change in accounting principle.
c.
Discuss the reporting of accounting changes that was required by APB Opinion
No. 20.
d.
Discuss how accounting changes are to be reported under the provisions of FASB
ASC 250.
Case 6-7
Sometimes a business entity may change its
method of accounting for certain items. The change may be classified as a
change in accounting principle, a change in accounting estimate, or a change in
reporting entity. Listed below are three independent, unrelated sets of facts
relating to accounting changes.
Situation 1
A company determined that the depreciable lives
of its fixed assets were presently too long to fairly match the cost of the
fixed assets with the revenue produced.The company decided at the beginning of
the current year to reduce the depreciable lives of all its existing fixed
assets by five years.
Situation 2
On December 31, 2010, Gary Company owned 51
percent of Allen Company, at which time Gary reported its investment using the
cost method due to political uncertainties in the country in which Allen was
located. On January 2, 2011, the management of Gary Company was satisfied that
the political uncertainties were resolved and that the assets of the company
were in no danger of nationalization. Accordingly, Gary will prepare consolidated
financial statements for Gary andAllen for the year ended December 31, 2011.
Situation 3
A company decides in January 2011 to adopt the
straight-line method of depreciation for plant equipment. This method will be
used for new acquisitions as well as for previously acquired plant equipment for
which depreciation had been provided on an accelerated basis.
Required:
For each of the preceding situations, provide the
information indicated below. Complete your discussion of each situation before
going on to the next situation.
a. Type
of accounting change
b. Manner
of reporting the change under current GAAP, including a discussion, where
applicable, of how amounts are computed
c.
Effects of the change on the statement of financial position and earnings statement
d.
Required e disclosures
Chapter 7
Case 7-2
The argument among accountants and financial statement
users over the proper valuation procedures for assets and liabilities resulted
in the release of SFAS No. 115 (see FASB ASC 320-19). The statement requires
current-value disclosures for all investments in debt securities and for
investments in equity securities that have readily determinable fair values and
for which the investor does not have significant influence. The chairman of the
Securities and Exchange Commission termed historical cost valuations
“once-upon-a-time accounting.” Historical cost accountingalso has been
criticized as contributing to the savings and loan crisis of the 1980s.
During that period, these financial institutions
continued to value assets at historical cost when they were billions of dollars
overvalued. Critics of current-value accounting point out that objective market
values for many assets are not available, current values cannot be used for tax
purposes, using current values can cause earnings volatility, and management
could use current value to “manage earnings.”
Required:
a. Determine
how current values might be determined for investments, land, buildings,
equipment, patents, copyrights, trademarks, and franchises.
b. How
might the use of current values in the accounting records cause earnings volatility?
c. Discuss
how management might manage earnings using current cost data.
d. How do
the requirements originally established by SFAS No. 157 affect the use of fair
value measurement in financial statements?
Case 7-6
The recent emphasis on capital maintenance
concepts of income as seen in the FASB’s support for “comprehensive income”
implies that balance sheet measurement should determine measures of income. That
is, accrual accounting is to focus on measurements in the balance sheet, and
because financial statements are articulated, measurements in the income
statement are residual in nature.
Required:
a. Do you
think this focus implies that the balance sheet is more important than the
income statement? Explain.
b. How is
the balance sheet useful to investors? Discuss.
c. What
is meant by the phrase “financial statements are articulated”?
d. Which
measurements currently reported in balance sheets are consistent with the
physical capital maintenance concept? Give examples.
e. Which
measurements currently reported in balance sheets are not consistent with the
physical capital maintenance concept? Give examples.
Case 7-7
The statement of cash flows is intended to
provide information about the investing, financing, and operating activities of
an enterprise during an accounting period. In a statement of cash flows, cash
inflows and outflows for interest expense, interest revenue, and dividend revenue
and payments to the government are considered operating activities.
Required:
a. Do you
believe that cash inflows and outflows associated with non operating items,
such as interest expense, interest revenue, and dividend revenue, should be
separated from operating cash flows? Explain.
b. Do you believe that the cash flows from investing
activities should include not only the return of investment but also the return
on investment—that is, the interest and dividend revenue? Explain.
c. Do you
believe that the cash flows from the sale of an investment should also include
the tax effect of the sale? Explain. Do you believe that cash flows from sales
of investments should be net of their tax effects, or do you believe that the
tax effect should remain an operating activity because it is a part of
“payments to the government”? Explain.
